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Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium [report]

Dominik Sachs, Aleh Tsyvinski, Nicolas Werquin
2016 unpublished
We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the eects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is xed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal
more » ... itially suboptimal and progressive, the general-equilibrium trickle-down forces may raise the benets of increasing the marginal tax rates on high incomes. We nally derive a parsimonious characterization of optimal taxes. * We thank Laurence Ales, for comments and discussions. Financial support from the ANR (Programme d'Investissement d'Avenir ANR-17-EURE-0010) is gratefully acknowledged.
doi:10.3386/w22646 fatcat:5hbphgldj5g2fnpm6hwdzbphlu